Who Decides Post-Bankruptcy Futures?

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eBlog, 9/07/16

In this morning’s eBlog, we consider the risk that state legislative interference in Detroit’s public schools—even after the schools have opened—could have harsh fiscal consequences for a city emerging from the largest municipal bankruptcy in the nation’s history. Then we turn to the grim tidings from post-municipal bankrupt Stockton, where the incumbent mayor—and candidate for re-election in November, and who was Mayor when Stockton emerged from its chapter 9 municipal bankruptcy, is on trial, raising serious questions about his moral fitness for public office. Finally, we turn to the steps underway to initiate the promise of PROMESA, the quasi-chapter 9 legislation signed last month by President Obama to steer the U.S. territory of Puerto Rico out of insolvency–and to a very unique American leader whose contributions to Washington, D.C., New York City, and New York’s subway system are legend–and who now will utilize that experience and expertise to help the U.S. territory of Puerto Rico.

Who Will Decide Detroit’s Future?  Last year, not a single Detroit public school complied with Detroit’s public health and safety codes, one reason teachers protested with widespread sickouts that temporarily crippled the system. This year, 92% of schools are in full compliance; the more significant changes for the nation’s most challenged big-city school system, however, will be governance: who will be in charge of changes so critical to the city’s long-term fiscal recovery? There will be a learning process not just in the schools, but also between Detroit and Lansing, because the city’s kids are returning to a brand-new public school district—one no longer encumbered with mountains of debt, but one, however, encumbered by politics even as it struggles to overcome its physical and fiscal insolvencies.

As we have attempted to chronicle, Governor Rick Snyder last June signed a sweeping education package to provide financial support for Detroit’s public schools modeled on the 2009 restructuring of post-bankrupt General Motors: that legislation left the old Detroit public school district behind as a shell to pay down $515 million in operating debt, similar to GM’s Chapter 11 which had created an “old” and “new” General Motors, with the intent of restructuring a public school system that was all but bankrupt: the state allocated more than $600 million to repair the DPS’s aging facilities, and the legislation allowed the schools—which include some of the nation’s worst and have been under state-run emergency management since 2009—to return to a locally run school board. Or, as John Walsh, Gov. Snyder’s director of strategy put it: “DPS is fiscally sound now.” Today, Detroit has more than a third of the state’s lowest-performing schools, according to a recently released list from the state’s School Reform Office, which has the authority to close those schools after three consecutive years. But the state office has not closed any low-performing schools since it was created in 2010. The School Reform Office could close more than 100 failing schools that qualify for shuttering, which has spurred panic among parents, teachers and other education groups.

The issue comes to the fore in the wake of Governor Rick Snyder last June signing a sweeping education package to provide financial support for Detroit’s public schools modeled on the 2009 restructuring of General Motors. The legislation left the old district behind as a shell to pay down $515 million in operating debt, similar to GM’s Chapter 11 that created an “old” and “new” General Motors, with the aim of restructuring a public school system that was all but bankrupt. Millions of dollars were allocated to repair the district’s aging facilities, and the legislation allowed the schools—which include some of the nation’s worst and have been under state-run emergency management since 2009—to return to a locally run school board. “DPS is fiscally sound now,” says John Walsh, Gov. Snyder’s director of strategy. Snyder’s use of state-appointed emergency managers has been widely scrutinized since the water crisis in Flint, where lead leached into the municipal water supply while the city’s finances were being overseen by the state. The water crisis raised questions about Snyder’s reliance on state managers to step in and fix local issues. But the state legislation created a dual school system in the Motor City of charter and public schools—potentially undercutting the intent of ensuring that DPS will be able to provide quality education in the long-term to compete with the growing number of charter schools throughout Detroit. Indeed, there are apprehensions in the city that state legislative meddling might, unwittingly, have paved the way to potentially end the Detroit public schools altogether. Because the state legislation created not just a dual system of public versus charter schools, but also of dozens of authorizers who determine where charter schools can open or close—that is, outside of any coherent, local process, but rather one in which any number of authorizers who do not work together to plan comprehensively can create chaotic situations in some neighborhoods: according to Detroit Mayor Mike Duggan’s office, 80% of Detroit’s public and charter schools have opened or closed in the last seven years. This would hardly seem a bright, shining beacon to attract families with young children to want to move to Detroit.

Moreover, even as the state interference has created a seeming Charlie Chaplin gold rush to open up any number of uncoordinated charter schools, the state education package for Detroit fell far short in the math department: less than a sixth of the appropriated funds went to DPS for transition costs: indeed, Alycia Meriweather, DPS’s interim superintendent, reports that $105 million of the $150 million allocated to help get the new DPS up and running is already earmarked for financial obligations from the old Detroit Public School District, while only $5 million is available for repairing school facilities. While Detroit will be able to spend all of the $7,400 that is allocated per student on actual education costs this year—as opposed to last year, when $1,100 of that funding per student went to pay the district’s debt—the district still has needs that will not be met, including at least eight schools that still need facility upgrades.

The state package, because of the way it was imposed on Detroit, has already led fears of the city becoming divided: more than 51,000 children attended Detroit charter schools last year; less than 48,000 kids attended its public schools. There are apprehensions the state legislation is creating its own tale of two cities: one for low-income minority children, and one not; and raising the governance question: should the state or the city have a greater say in the city’s children’s futures? What seems growing clear is that running a school system is hard—but having dual managers with very different political perspectives seems to be putting children’s futures at stake. Arlyssa Heard, a member of 482Forward, a group of local parents who raise awareness about the state of the schools, perhaps has the best perspective: after all, she has a son who has started fifth grade this fall and has already been in three different Detroit schools so far—one public, one charter, one private. She notes: “We have people making decisions who do not have children here and don’t know anything about what educators are facing in the classroom…My dream is that there is some way to take this decision out of the hands of politicians and put it in the hands of educators and parents. Those are the two groups that have the most vested in the school system.”

Distant School Managers. No doubt, Ms. Heard is referring to the distant attempts at Detroit school governance emanating from the Michigan Legislature, where, yesterday, Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) and House Speaker Kevin Cotter (R-Mount Pleasant) said they would consider requesting that Michigan Attorney General Bill Schuette involve himself in a dispute between the state legislature and Gov. Rick Snyder with regard to how soon some of the worst schools in Detroit could be closed. That is, even though the Detroit Public Schools has both a gubernatorial appointed Emergency Manager and an elected public school board, the two Republican state leaders insist Detroit’s public schools can still be closed immediately if they have been among the state’s lowest five percent of performing public schools for three consecutive years. Gov. Snyder’s administration, however, relying on a law firm’s interpretation of the $617 million bailout legislation for DPS, contends that none of the city’s 47 schools that are in the bottom five percent for academic achievement can be closed until July of 2019. Indeed, last month, Gov. Snyder’s director of strategic policy had provided a memorandum to DPS Emergency Manager and retired U.S. Bankruptcy Judge Steven Rhodes which opined that the three-year countdown to close schools had been reset when DPS was transferred to a new debt-free district in July. Nevertheless, Majority Leader Meekhof yesterday disagreed; he said the law clearly allows a state office to close schools prior to that date and is “confused” how the Governor’s office could have reached a different conclusion. With the issue coming to a head, even as the school year has already commenced, Leader Meekhof also emphasized his Republican caucus would not likely support allowing Gov. Snyder’s interpretation of the law to stand and that passing a clarifying law would not be a good option because “a lot of folks have fatigue on Detroit issues.” This, apparently, passes as a reason for far away state legislators to preempt local authority—and disrupt an already chaotic school year.

Detroit has more than a third of the state’s lowest-performing schools, according to a recently released list from the state’s School Reform Office, which has the authority to close those schools after three consecutive years. But the state office has not closed any low-performing schools since it was created in 2010. The School Reform Office could close more than 100 failing schools that qualify for shuttering, which has spurred panic among parents, teachers and other education groups. Perhaps, appropriately, the last wise word should come from Chris Wigent, director of the Michigan Association of School Administrators, who opposes closing poorly performing school districts: “I think anytime you walk into a community and mention closing a school, that creates a lot of concern,” said “There is no data that shows moving a child from one school to another school has any positive” impact on students’ test scores.”

Post Municipal Bankruptcy Blues. With elections just around the corner in post-bankrupt Stockton, incumbent/candidate Mayor Anthony Silva’s attorney yesterday charged his client has been victimized by “outrageous government conduct,” as he sought the suppression of evidence from a warrantless federal search and seizure of his electronic devices nearly a year ago at San Francisco International Airport. The candidate/Mayor is scheduled this afternoon for his second court date since his arrest last month on charges he participated in and illegally recorded an alcohol-fueled game of strip poker with teenagers in 2015 at his annual summer youth camp in Silver Lake. The Mayor pleaded not guilty at his initial court appearance last month: he claims he is the victim of a political smear campaign being waged because he is a “threat” to Stockton’s establishment; however, the court proceedings come as he faces his colleague in his bid for re-election against City Councilman Michael Tubbs in November. The “outrageous government conduct” allegation referred to by Mayor Silva’s attorneys apparently refer to the website of the U.S. Attorney’s Office, claiming the conduct by law enforcement agents was “so outrageous that due process principles would absolutely bar the government from invoking judicial process to obtain a conviction.” However, Amador County Chief Assistant District Attorney Robert Trudgen said the government is confident in its case, though he acknowledged that the amount of discovery the defense has received to date has been sparse. If the role of municipal elected leaders—especially in municipalities emerging from chapter 9 municipal bankruptcy—is to inspire confidence, the road ahead in Stockton could be rocky.

Puerto Rico’s Fiscal Future. The Congressional Task Force on Economic Growth in Puerto Rico yesterday announced it is extending to October 14th its deadline for interested stakeholders to submit recommendations on how to promote economic growth within the U.S. territory—extending the original deadline of last Friday: in part that appears to stem from the 300 plus submissions already received—none of which have, however, been made public. Congress crated the task force as part of the PROMESA law to explore critical issues related to potential improvements that could bolster job creation, reduce child poverty, and attract investment to the U.S. territory; it is distinct from the newly appointed seven-member oversight board charged with restructuring the island’s debt and fiscal future; it is chaired by Sen. Orrin Hatch (R-Utah) and includes Sens. Robert Menendez (D-N.J.), Bob Nelson (D-Fla.), and Marco Rubio (R-Fla.), along with House members Pedro Pierluisi (P.R), Rep. Tom MacArthur (R-N.J.), Sean Duffy (R-Wis.), and Nydia Velázquez (D-N.Y). The task force is charged with submitting a report by the end of this year which identifies any current impediments federal law and programs which might impede economic growth or healthcare coverage for the territory and, importantly, recommendations to fix them.  

Experience & Insight. Few Americans have better background or experience in the kind of expertise the Congressional Task Force was looking for than Richard Ravitch, who served on similar oversight boards for both Washington, D.C. and New York City. Ergo, unsurprisingly, Puerto Rico Gov. Alejandro García Padilla yesterday named the former New York Lt. Governor to represent his positions to the PROMESA oversight board, noting Mr. Ravitch has advised Puerto Rico’s government on an unpaid basis for three years. Under the new PROMESA statute, Gov. Padilla was authorized to either serve as a nonvoting, ex officio member of the board or to designate someone for this role. The governor has made clear his urgency in getting the new board to address the commonwealth’s fiscal problems—noting, especially, the urgency from his perspective of restoring democracy in Puerto Rico. Gov. Padilla noted, in his statement, that Mr. Ravitch has advised Puerto Rico’s government on an unpaid basis for three years.

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